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Producers see destocking, stable order rates setting stage for an upturn

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Will 2010 be the year that titanium stages a comeback? The jury is still out, but there's little argument that commercial aerospace will play the key role.

If a sharp rebound isn't in the works for 2010, the industry is at least looking for the stage to be set for what it hopes might be a solid upturn the following year after a downturn that hasn't been as disruptive as past slumps.

While industrial and other non-aerospace markets typically account for about half of global titanium demand, it's a far different story in the United States. More than 70 percent of the more than 14,400 tonnes (31.75 million pounds) of titanium mill products shipped in the United States in the first half of 2009—down 5.5 percent from 15,240 tonnes (33.6 million pounds) in the same period a year earlier—went to aerospace, according to the U.S. Geological Survey, with the majority for commercial transports.

From a mill perspective, 2010 is likely to continue as "a challenging year" for producers, according to William A. Pallante, senior vice president of commercial at Pittsburgh-based RTI International Metals Inc.

Taken together, the amount of titanium mill products shipped by the nation's three major producers—RTI, Allegheny Technologies Inc. (ATI), also based in Pittsburgh, and Dallas-based Titanium Metals Inc. (Timet)—dropped to 35 million pounds in the first nine months of 2009, down 26 percent from 46.7 million pounds a year earlier. (ATI's figures include shipments from its High Performance Metals group, which accounts for most of its aerospace titanium.)

In 2009, the market continued to dig itself out of an inventory overhang resulting from a buying and expansion surge that peaked in mid-2006 as the industry braced for the impact of Boeing Co.'s 787 Dreamliner, whose order book of 850 planes requiring an estimated 250,000 pounds of titanium buy weight per copy promised unprecedented demand. But delays on the 787 adding up to more than two years have helped create a surplus in the supply chain that's estimated at 30 million to 35 million pounds, although some of the material in ingot form could be shifted to other programs besides the Dreamliner.

Destocking continues, Pallante said, adding that the amount being moved out of excess warehouse stocks could "reduce or dampen demand" at the mill level in 2010.

Build rates on existing airliners aren't expected to increase in 2010 as selected cutbacks on programs such as the Boeing 777 will be implemented. And as airline flight hours continue at low levels, that could mean the 2010 engine spares market might not be much better than it was in 2009.

However, if build rates on single-aisle aircraft don't otherwise fall, and if inventory destocking levels off, that could argue against a further decline in 2010. "That might lead to a little more of an improvement, but I don't think it will be significant," said an executive of VSMPO-Avisma Corp., based in Verkhnyaya Salda, Russia. On the other hand, compared with past titanium down cycles the current decline hasn't been as bad as it might have been, he said, attributing much of that to support from the commercial transport sector.

Indeed, Boeing, which has long-term titanium supply agreements on its commercial aircraft programs with VSMPO—along with ATI and Timet—has said previously that despite the 787 delays it would continue to honor provisions of its long-term deals and accept shipments from mills. While this probably helped contribute to the supply chain surplus, it likely also was a factor in U.S. mill product shipments reaching a historical high of 76.6 million pounds in 2008. But at least one new long-term agreement—with Timet—was negotiated recently, although the details of Boeing's obligations to take material under the new agreement weren't disclosed.

Frank Perryman, president and chief executive officer of Perryman Co., a Houston, Pa.-based producer of titanium bar, rod and fastener stock, sees indications of a "flat to slight increase" in 2010, reflecting a normal order pattern in contrast to the sporadic conditions that characterized the industry during the past 18 months or so.

Perryman said that in contrast to some earlier characterizations there's no longer any reason to describe titanium prices as in a free-fall, usually a symptom that inventory is being dumped. "We're not seeing that now," he said at the end of November, citing a rebound in scrap prices, a sign in his view that the market might be on the "verge" of a positive turn.

If 2010 won't be the year titanium takes off again, one major service center thinks it's at least likely to set the stage for a comeback. "My hope is that 2010 is going to be like 2004," said Jerry St. Clair, president of Vulcanium Metals Inc., Northbrook, Ill., referring to the first year after the last titanium market cycle hit its low point. He described a period when prices were stabilizing and shipments were picking up but few people were inclined to see the recovery under way because they were still looking over their shoulders at the post-Sept. 11, 2001, recession.

St. Clair sees 2010 marked by the continued work-off of surplus inventories and stabilization in order rates, and agrees with Perryman's assessment that the free-fall in prices has already been stemmed.

Spot prices for standard 6 aluminum/4 vanadium aerospace ingot declined to an estimated $8.25 to $9.25 per pound in the third quarter of 2009 from a high of nearly $30 per pound in mid-2006, according to AMM data.

Jeff Wise, vice president of sales and marketing for Rockaway, N.J.-based distributor Titanium Industries Inc., holds the relatively optimistic view that volume will begin to increase sometime in 2010 and gain momentum toward year-end. He believes production capacity has already been reduced to such a low level that any uptick in volume is likely to help support a price hike, especially with distributor inventories now "commensurate with market demand."

Wise pointed out that while prices reached historical peaks during the now-ended boom, mills have actually done a good job "ratcheting them down" without letting prices "fall off a cliff," which had been the pattern during past slumps. Frank Haflich

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